UNITED NATIONS, May 16 (Reuters) - Syria remains the topdestination for Iranian arms shipments in violation of a U.N.Security Council ban on weapons exports by the Islamic Republic,according to a confidential report on Iran sanctions-bustingseen by Reuters on Wednesday.

Iran, like Russia, is one of Syria's few allies as itpresses ahead with a 14-month old assault on opposition forcesdetermined to oust Syrian President Bashar al-Assad.

News of the panel's report came as Tehran and the U.N.International Atomic Energy Agency try narrow their differenceson how to tackle concerns over Iran's atomic program, and asIran prepares for talks with the five permanent council membersand Germany in Iraq next week.

The new report, submitted by a panel of sanctions-monitoringexperts to the Security Council's Iran sanctions committee, saidthe panel investigated three large illegal shipments of Iranianweapons over the past year.

"Iran has continued to defy the international communitythrough illegal arms shipments," it said. "Two of these casesinvolved (Syria), as were the majority of cases inspected by thePanel during its previous mandate, underscoring that Syriacontinues to be the central party to illicit Iranian armstransfers."

The third shipment involved rockets which Britain said lastyear were headed for Taliban fighters in Afghanistan.

"The Panel recommends the designation (blacklisting) of twoentities related to these interdictions," it said. "The reportalso takes note of information concerning arms shipments by Iranto other destinations."

Diplomats told Reuters that the panel's draft report may bechanged by the Security Council's Iran sanctions committeebefore it is submitted to the council itself for consideration.

It was unclear how long it would take the committee to passthe report to the Security Council. Last year's expert panelreport on Iran was never made public because Russia blocked itspublication.

The report also discusses Iran's attempts to circumventsanctions on its nuclear program but notes that the four roundsof punitive measures the 15-nation Security Council imposed onIran between 2006 and 2010 are having an impact.

"Sanctions are slowing Iran's procurement of some criticalitems required for its prohibited nuclear program," it said. "Atthe same time prohibited activities continue, including uraniumenrichment."

"The Panel identifies the acquisition of high-grade carbonfiber as one of a number of critical items Iran requires for thedevelopment of more advanced centrifuges," the report said,adding that states should be on alert for illicit attempts toacquire such critical items.

Iran rejects allegations by Western nations and their alliesthat it is secretly developing the capability to produce nuclearweapons. It has refused to suspend its enrichment program asdemanded by the Security Council, despite being hit withincreasingly draconian U.N. and various national sanctions.

The report talked at length about Islamic Republic of IranShipping Lines, known as IRISL. While IRISL itself is notformally under U.N. sanctions, three of its subsidiaries are,and the council has warned U.N. member states to be vigilantregarding potential sanctions violations by IRISL.

The panel report said that Irano Hind Shipping Company, oneof the IRISL subsidiaries subject to sanctions, continues tooperate vessels. IRISL is a difficult company to monitor becauseit is constantly changing the ownership, names and nationalflags of its ships, the report said.

"Iran's ballistic missile program continues to develop withadditional launches, which are prohibited under resolution1929," adopted in June 2010, the report said.

"The Panel takes note of the recent designations (U.N.Security Council blacklisting) ... of two (North Korean)entities and their links to Iran's ballistic missile program."

The two North Korean companies linked to Iran's missileprogram are the Green Pine Associated Corp and the KoreaHeungjin Trading Company. The council's North Korea sanctionscommittee blacklisted them on May 2.